Sheila Bair blames Geithner, Paulson and Bernanke for the credit crisis

Former FDIC chair Sheila Bair’s departure from government has been unusual for a number of reasons. First, she is not getting on the gravy train in the private sector that former officials usually do. What’s more is she allowed the New York Times Joe Nocera to pen an exit interview with Bair that was scathing in its condemnation of both the Bush and Obama Administrations in which she served. More compellingly, she has now gone on the record with an Op-Ed in the Washington Post writing those same sharp criticisms herself.

The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help.

Already we have heard rationalization of the subprime mortgage debacle and denigration of those of us who have advocated long-term, structural changes in the way we regulate the financial industry. Too many industry leaders, as well as some government officials, compare the crisis to a 100-year flood. “Who, us?” they say. “We didn’t do anything wrong. Nobody saw this coming.”

The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society.

Short-termism and the risk of another financial crisis

Bair is too diplomatic to name names. But she is as blunt and direct as you can be without doing so. While no names were named it is abundantly clear from the Nocera piece at whom she points a disapproving finger: Paulson, Summers, Geithner, Bernanke, Greenspan. In fact, looking through the Credit Writedowns archives I see myself using the same language as Bair, pointing at the same characters.

For example, on the ‘100-year flood’ I wrote the following parody of Geithner and Summers’ thinking last November (click the links and read to see the falsity of this parody narrative):

"Wow, this crisis has been more severe than anyone could have imagined. Obviously, none of this was foreseeable because the U.S. banking system is basically sound. We have the most robust and competitive institutions in the world. So my calls for gutting regulation in the past [Summers as Treasury Sec.] and my looking the other way as leverage built up all around me in the lead up to crisis [Geithner at the NY Fed] cannot be faulted. Certainly, if some government watchdogs had picked up on an epidemic of financial fraud being perpetrated, that would be another story.

So, what do we do now that this 100-year flood has come our way?

We’ll probably be forced to do deeply unpopular, deeply hard to understand things like bailing out the banks. It’s not like we want to do this. But we have to because the banks are suffering a liquidity crisis; we can’t just put them into receivership like the obviously insolvent Fannie and Freddie.  They just need a little push, some stress tests and we can get through this. Anyway, people would panic if we took a big bank into receivership. They couldn’t open for business.

A few comments about Tuesday’s election’s impact on the economy

On these Voodoo People and their short-termism causing another crisis, I wrote last April:

"it’s the debt, stupid."  When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

This short-termism that [William] White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.

The origins of the next crisis

This is the exact same terminology Bair is using. So clearly, when she says “some of us did see this coming”, it is true, some of us did see this coming. And what we are saying now is that we are headed for another crisis in short order. And I suspect when this is over , that’s when people will start taking her view more seriously.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.